Collecting Class 2 and 4 NIC through self assessment is continuing to cause problems

Class 2 NIC was collected by direct debit for years up to 2014/15. The contributions for 2015/16 are being collected through self assessment, but this change has not been without its problems.

A Tax Faculty news item in June covered some of the problems that have been occurring with collection of Class 2 NICs through self assessment and included information that HMRC had given in a Talking Points webinar for agents. There have also been issues in cases where the maximum annual contribution rules apply.

Members have continued to report problems and the Tax Faculty has obtained some further updates from HMRC. It is not clear that these fully address the problems and we are concerned that many taxpayers and their agents will not become aware of issues until January 2017. 

 

The four issues on which we have received an update from HMRC are as follows:

Software issue – error preventing population of Class 2 NIC liability in commercial software  

There was an error with HMRC software which was preventing the Class 2 liability figure from being correctly fed into commercial tax return software. The system worked correctly up to mid-June 2016 when it became necessary to suspend its operation while the problem was investigated. A fix implemented on 17 July 2016 corrected most records affected by this issue. However, a small number of cases have been identified where this fix has not worked. HMRC is currently working with its IT supplier to resolve these. Note that not all commercial software suppliers have registered to receive a feed of Class 2 liability information from HMRC.

Class 2 NIC liability not matching HMRC records

Agents and taxpayers have been filing tax returns showing a liability to Class 2 NICs only to find that HMRC reverses that charge (and in some cases has made an incorrect refund based on that incorrect liability). HMRC advises that in “almost” all reported cases the taxpayer has not been registered as self-employed in the National Insurance System (NPS) and that is why the charge has not been applied.

An individual who is both employed and also self employed, should have a record in each of the NPS and self assessment systems. The information in these two systems should be aligned as the NPS should feed information through to self assessment. An online registration as self-employed updates both the self assessment record and NPS for NI purposes, but this was not always the case. Notifying HMRC that a taxpayer has started or ceased self-employment on a tax return does not update the NPS system.

ICAEW is not yet satisfied that failure to be registered as self-employed for Class 2 purposes explains all the cases reported to us – in some cases reported to us, the taxpayer has been paying Class 2 regularly by direct debit for many years. In others, the problem may perhaps be explained by temporary National Insurance numbers mentioned below. Cancelling a Class 2 NIC direct debit can act as a notification that self-employment has ceased for NICs purposes, which may explain some further cases.

It is disappointing that HMRC has not previously recognised the level of discrepancy between the two databases (self assessment and NPS) and addressed the issue. We understand that the only way to resolve the problem is on a case by case basis which is unsatisfactory.

Temporary National Insurance numbers

It seems that some self assessment records do not contain the taxpayer’s correct National Insurance number. Unfortunately each of these cases has to be resolved individually by the taxpayer or their agent contacting HMRC to correct the NINO held in self assessment.

Class 1, 2 & Class 4 interaction

The deferment process has been replaced by a system of HMRC taking Class 1 contributions into account when calculating Class 2 and 4 to be collected through self assessment. HMRC has to process a PAYE scheme’s final data for the tax year before the Class 1 paid shows up in the taxpayer’s self assessment record or can be populated into commercial tax return software. This process of transferring RTI data to individual taxpayer records takes some months and is not generally completed until early autumn following the end of the tax year. Until this has been done HMRC’s calculations of Class 2 and 4 liability will not take into account any Class 1 contributions paid (and HMRC’s calculations override calculations on the tax return).

HMRC is encouraging taxpayers and agents to continue to file self assessment tax returns even though the National Insurance liability may be wrong if maximum contribution rules apply. If required, HMRC will issue a revised calculation after the relevant PAYE scheme has been processed. This is an unsatisfactory process creating a lot of additional work and contact. The agent and taxpayer have no easy way of knowing whether the incorrect liability is because the relevant PAYE scheme has not been processed or there is some other error causing no or incorrect Class 1 contributions to be shown on the record. (There is some information available in the online portal under Tax Return Option, information which may be helpful to help you complete your tax return).

Members have raised some other issues:

Direct Debit payments still being collected

Direct debits for Class 2 NICs should have ceased in July 2015 (settling the liability up to the end of 2014/15) except for the following categories:

  • Those working overseas and continuing to pay voluntary Class 2 NICs
  • Examiners, moderators, invigilators and people who set exam questions
  • People who run business involving land and property
  • Ministers of religion who do not receive a salary or stipend
  • Those who make investments for themselves or others but not as a business and without getting a fee or commission.

If direct debits are being taken for any other category of taxpayer that is probably incorrect and it will be necessary to contact HMRC to get the record corrected.

A1 certificates

Individuals going overseas may be able to obtain an A1 certificate to remain in the UK social security system and avoid having to pay contributions in the foreign jurisdiction. Such individuals will continue to pay any Class 2 contributions due for the period covered by the certificate directly to HMRC, even if they are in self assessment for the relevant tax year. If a certificate covers only part of a tax year, this means that the liability for that part of the year is collected directly by HMRC (by direct billing in the autumn after the end of the tax year) and the liability for the rest of the year is collected through self assessment. HMRC has so far shown no interest in changing this process.

There can be a time-lag before the A1 qualifying weeks are reflected in the NIC system and therefore the self-assessment data can change retrospectively.

Reaching state retirement age

Class 2 NIC contributions should cease at the end of the week in which the taxpayer reaches state retirement age. A report from a member suggests that this part of the system may not be working correctly - we are currently following this up.

Please comment below if you are encountering difficulties with these processes – particularly if you have an issue which is not mentioned above. If you have particular cases that we could use as evidence of widespread issues please email caroline.miskin@icaew.com; we may need specific case details.

HMRC has scheduled a further Talking Points webinar for agents on this topic. Register for the meeting on Wednesday 14 December 2016, 13:00 to 14:00.

Anonymous
  • Dealing  just  now  with a situation concerning  Class  4 NIC   with   the SA numbers being over written  by incorrect  numbers from the NIC  system.   I have spent  so far around five hours on sorting out the mess created by the NIC  system which regretfully will  cost my client  £420.00. It is a national disgrace  that   the HMRC  is so  inefficient  that   our clients  must bear  such  high  costs of tax  compliance.   I pity  the taxpayers  when  MTD  comes  into effect.  As accountants  we should be  fighting hard  to  prevent the introduction   of MTD.

  • Dealing  just  now  with a situation concerning  Class  4 NIC   with   the SA numbers being over written  by incorrect  numbers from the NIC  system.   I have spent  so far around five hours on sorting out the mess created by the NIC  system which regretfully will  cost my client  £420.00. It is a national disgrace  that   the HMRC  is so  inefficient  that   our clients  must bear  such  high  costs of tax  compliance.   I pity  the taxpayers  when  MTD  comes  into effect.  As accountants  we should be  fighting hard  to  prevent the introduction   of MTD.

  • I submitted a 2015/16 return for a client who changed from self-employment to employment, then reached state pension age later in the year.  HMRC amended my calculation to charge Class 2 up to SPA rather than the earlier date when self-employment ceased.  That has now been corrected, but both SA302s show the following crazy message on the calculation:

    Your Class 4 has been adjusted for Class 2 due and £148,236.00 primary Class 1 contributions paid

  • New client had telephoned HMRC to register as s-e but they only put him in SA, not registering him for Class 2.  When the tax return was "corrected" we registered him with NICO and the tax return "correction" was reversed back to the correct figures on teh return.  However, another "correction" was tehn issued taking the Class 2 out again - the HMRC agent helpline staff could not see any reason for this and referred it to technical officers but we have heard nothing more.

  • Advanced payment of NI 2 is required to claim maternity allowance. This is then deducted from Class 2 owed on the tax return but HMRC not picking up the advanced payment and has issued a recalculation for the full Class 2.